Many people may need to take out a personal loan at some point in their lifetime. Emergencies and unexpected expenses happen, and these situations can often be expensive. That’s why personal loans can come in handy–you get the money you need upfront while paying it back monthly over a few years. But if you can pay off the loan sooner, that may help, because you could avoid paying extra months of interest. Here are a few ways to pay off a personal loan faster:
- Make extra payments.
- Save more money each month.
- Increase your monthly income.
- Consider refinancing your personal loan.
Should you pay off your loan sooner?
There are pros and cons to paying off your loan early. For example, if you took out a personal loan to be repaid in 36 months but can pay it off in 30, that may work well for you because you’ll save six months of interest charges. We’ll tell you about the good and the bad when it comes to paying off your personal loan early.
As mentioned earlier, paying off a personal loan early can save you money on interest. The faster you can pay off a loan, the less it will cost you in interest. And that can add up to hundreds, even thousands, of dollars. Another positive to paying off your loan early is that you’ll have more money in your bank account each month because you won’t be making any more monthly payments on your loan. Paying off your personal loan sooner can also help lower your debt-to-income ratio, which is the amount of your debts divided by your income. Lowering this can improve your credit score and help you qualify for better loan rates and terms in the future.
But there are also a couple of reasons why you may not want to pay off your loan early. Depending on your loan agreement, you may be charged a prepayment penalty for paying off the loan too early. Some lenders (not Sun Loan!) charge this fee to recover the interest money they would have received if you continued paying the loan until the end of its term. Without that interest, lenders don’t make money on your loan–a prepayment penalty ensures they do. Also, paying back a loan early may briefly hurt your credit score, especially if you’re still trying to build up your credit. That’s because, for each monthly payment you make on time, your credit score usually improves. If you no longer have these monthly payments to make, that’s one less way for you to keep building your credit score. However, even if your credit score is lowered because you paid off a loan early, it is usually for only a short period of time.
1. Before making additional payments, check if there is a prepayment penalty
We already covered what a prepayment penalty–a fee sometimes included in a loan contract to help lenders recover the interest they would miss out on if the loan is repaid ahead of the scheduled loan term. This amount is usually a percentage of the unpaid principal loan balance when you pay it off.
It is important to read your loan documents carefully and ask about prepayment penalties before you decide on an early loan payoff. Paying the loan off early may save you interest, but a prepayment penalty can cost you just as much as what you would have saved on interest.
2. Start paying extra payments
If you do decide to pay off your personal loan early, there are a few ways to do so. One is to make extra payments on the loan, which will lower your balance faster. To make extra payments, you may have to make a couple of adjustments to your other finances.
Reduce expenses
To have the money available to make extra loan payments, you may cut down on some other expenses each month.
- Revisit your budget: If you already have a set budget, take another look at it and adjust a few things so you have the money to make those extra payments.
- Set savings goals: If you don’t already have savings goals, make some. Decide how much money you need to save and, again, adjust accordingly.
- Cut unnecessary expenses: If there are some services or subscriptions (like newspapers, magazines, streaming services, etc.) or items you think you can do without, cancel them so you can save more each month.
- Find discounts on purchases: Be a bargain shopper! Research sales and shop for the best prices on items to save money.
- Delay purchases: If you can put off some purchases for a while, do that so you can keep saving for your extra loan payments.
Increase income
Sometimes it’s easier said than done. But if you can increase your income, you could have the extra money you need to pay off your loan sooner.
- Get a higher-paying job: You never know when a better opportunity may come up. Take some time to look at Indeed or LinkedIn for a job that pays better than the one you have now.
- Ask for a raise: You don’t know until you ask. See if your boss or company would be willing to increase your salary or hourly rate of pay–that might be enough to help you make extra loan payments.
- Work extra hours: If your job pays you hourly, try to take on extra hours each week. Even just a few will add up every month.
- Work a second job: If you have the time, try to find a second job to help you pay off your loan sooner.
- Sell items: Look through your home. Perhaps you have some items you no longer need. If so, post them for sale on an online marketplace or a site like eBay, have a yard sale, or take them to a local pawn shop for some quick cash.
3. Consider refinancing your personal loan
Interest rates on loans go up and down often. Perhaps you took out your personal loan when interest rates were high. Maybe the interest rate is lower now. If so, that might be a good time to refinance your personal loan. If you are able to get a lower interest rate on a personal loan, you would apply for a new loan–at the lower interest rate–and then use the money from the lender to pay off your original loan with the higher interest rate. Now you’ll make monthly payments on the new loan, but the monthly amount should be lower because if you got a lower interest rate on the loan.
However, If interest rates are similar or even higher than your current loan’s interest rate, it would be best to wait until those rates fall before you refinance. It’s important to do the math, so you know that refinancing your personal loan saves you money. Remember, you’ll probably have to pay fees and closing costs on the new loan. Just make sure that these don’t make your new loan amount as high as before. You should only refinance your loan if you know you’re saving money each month.
There are some benefits to paying off a personal loan early if you can afford it. However, find out whether your loan has any prepayment penalties, and be sure you can afford to make extra loan payments each month without draining your finances. Speed Loan is here to help you, and the first step is learning more about personal loans and how they work. We have some helpful resources that provide the information you need to know about personal loans. Our personal installment loans may be just the solution since they allow you to get the money you need now and to repay through a consistent set of affordable monthly payments
